SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended DECEMBER 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ___________.
Commission file number 000-23967
ZMAX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2040275
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20251 CENTURY BLVD. GERMANTOWN, MD 20874
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 353-9500
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [ ]
The aggregate market value of the registrant's Common Stock, par value
$.001 per share, held as of March 16, 1999 by non-affiliates of the registrant
was $50,829,204 based on the average bid and asked prices of the Common Stock
on such date.
As of March 30, 1999, the registrant had 13,117,214 shares of its Common
Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-K is incorporated
by reference from the registrant's definitive proxy statement or amendment
hereto which will be filed not later than 120 days after the end of the fiscal
year covered by this report.
<PAGE>
ITEM 1. BUSINESS.
INTRODUCTION
ZMAX Corporation ("ZMAX" or the "Company") focuses on acquiring,
building and operating companies in the information technology ("IT")
industry. In 1996, the Company acquired all of the stock of Century Services,
Inc. ("CSI"), a corporation that provides re-engineering and information
processing services to users of large-scale computer systems in North America.
CSI currently specializes in assisting business organizations and government
agencies with what has become popularly known as the "Year 2000 problem"
("Y2K"). In December of 1998, the Company acquired all of the stock of Eclipse
Information Systems, Inc. ("Eclipse"), a corporation that provides IT
consulting services through several practice areas focused in distributed
client server technologies. Over the next several years, the Company expects
to devote substantial resources to developing and expanding its IT services
through internal growth and synergistic acquisitions.
BUSINESS STRATEGY
The Company believes the current market for IT services is rapidly
changing and expanding, driven by pressures placed on companies to: increase
the productivity of its workforce, allow management to make better decisions
by having instant access to more information, enable customers and suppliers
to interface electronically, and to utilize new technologies where they will
help in these efforts. As a result of these pressures, the Company believes
that there are significant opportunities for growth in the IT services
marketplace.
To take advantage of these opportunities, the Company's strategy is to
further expand its core expertise, as previously developed in performing and
managing Y2K re-engineering projects, into additional IT areas including
client server application migration services, Enterprise Resource Planning
("ERP") implementation services and E-business solutions. These three practice
groups are expected to form the core of the Company's expansion of its IT
consulting business beyond Y2K services. The Company believes that through
focused internal development and further acquisitions of rapidly growing IT
consulting companies, the Company's existing expertise may be rapidly expanded
in these areas.
To support these targeted growth plans, the Company's business strategy
incorporates the concepts of seeding internal growth by opening new offices in
key geographic markets and selecting potential acquisitions that can
supplement and expand the Company's technology base and regional exposure. The
Company believes that a strong branch network of offices will enable it to
have an improved ability to service larger national accounts that may generate
greater revenues.
The Company's ability to expand successfully by internal development and
strategic acquisitions depends on many factors, including the identification
and acquisition of businesses and the successful operation of new offices. Any
difficulties encountered in the expansion of the Company through internal
development and/or acquisition could have an adverse impact on the Company's
revenues and operating results.
<PAGE>
CLIENTS
The client base of the Company is located throughout the United States.
All Y2K customers have been serviced through the Germantown, Maryland
headquarters facility where the Company's Y2K compliance factory is located.
The centralized control and processing of customers' computer codes permits
economies of scale and will continue in 1999 and beyond. The Company's Y2K
clients represent a variety of industries including: banking, utilities,
healthcare, telecommunications, aerospace, retail, and the public sector. Y2K
commercial clients of the Company include: Lockheed Martin, Lehman Brothers,
Alliance Capital, Bessemer Trust, SEI Investments, Ernst & Co., Washington Gas
Light Corporation, First National Bankcorp, United Bankshares, Westchester
Medical Center, and Harvard Pilgrim Healthcare. Y2K public sector clients of
the Company include: the States of New Jersey, New York, California, and
Maryland and the Federal agencies of Housing and Urban Development and the
Department of Defense.
With the recent acquisition of Eclipse in December of 1998, the Company
added approximately eighteen clients of similar size and quality. Examples of
the Eclipse clients include: Abbott Labs, Ameritech, AON, Baker & McKensie,
Baxter/Allegiance, Coilcraft, Elkay Manufacturing, Hewitt, Nestle, Pampered
Chef, RR Donneley, Spencer Stuart, THK America, Transamerica, Trans Union, and
Wrigley.
The Company has historically derived, and may in the future derive, a
significant percentage of its total revenue from a relatively small number of
clients. During 1998, three customers represented an aggregate of 73% of the
Company's total revenues for the year. During 1997, three customers
represented an aggregate of 60% of the Company's total revenues for the year.
Due to the nature of the Company's business and the relative size of certain
contracts, the loss of any single significant customer could have a material
adverse effect on the Company's results of operations.
MARKETING AND SALES
The Company focuses its marketing efforts on mid-sized to large
corporations with significant IT budgets and requirements. While the Company
currently performs work for companies across many major industries, most of
the Company's revenues in 1998 were derived from state governments, the
financial services industry, the healthcare industry, and utility companies.
The Company markets its services through its direct sales force and
alliances with a number of strategic partners. The direct sales force is
responsible for providing highly responsive service and ensuring client
satisfaction with the Company's services. The Company's partners provide
additional access to potential customers that would otherwise be more
difficult for the direct sales force to penetrate.
<PAGE>
COMPETITION
The market for the IT services that the Company provides is highly
competitive, includes a large number of competitors and is subject to rapid
change. The primary competitors of the Company include participants from a
variety of market segments, including publicly and privately held firms, "Big
Five" accounting firms, systems consulting and implementation firms,
application software firms, service groups of computer equipment companies,
and other general management consulting firms. Increasingly, companies from
foreign countries are also targeting this market. The Company believes its
principal competitive advantages include its software tools, its ability to
quickly modify those tools to address the changing marketplace, and its
commitment to client satisfaction.
INTELLECTUAL PROPERTY
The Company's intellectual property primarily consists of the
methodologies developed for use in its Y2K services and ownership or exclusive
rights to the use of its software tool suite known as the VISION 2000SM
solution. The Company does not have any patents and relies upon a combination
of trade secret, copyright and trademark laws and contractual restrictions to
establish and protect its ownership of its proprietary methodologies and
exclusive rights to use its software tool suite. The Company generally enters
into non-disclosure and confidentiality agreements with its employees,
independent sales agents, and clients. As the number of competitors providing
Y2K services similar to those offered by the Company increases, it is more
likely that substantially similar tools and methodologies will be used in
providing such services. Although the Company's software products and services
have never been the subject of an infringement claim, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future, that the assertion of such claims will not result in
litigation, or that the Company would prevail in such litigation or be able to
obtain a license for the use of any allegedly infringed intellectual property
from a third party on commercially reasonable terms. Furthermore, litigation,
regardless of its outcome, could result in substantial cost to the Company and
divert management's attention from the Company's operations. Although the
Company is not aware of any basis upon which a third party could assert an
infringement claim, any infringement claim or litigation against the Company
could therefore materially adversely affect the Company's business, operating
results, and financial condition.
PERSONNEL
As of December 31, 1998, the Company had 137 full-time employees
including 14 persons in sales, 109 persons in operations and engineering and
14 persons in management and administration. The Company also employs
temporary employees and consultants.
<PAGE>
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located at 20251 Century
Boulevard in Germantown, Maryland, outside Washington, D.C. The Company and
its subsidiary, Century Services Incorporated, currently occupy approximately
13,000 square feet through a sublease that expires September 30, 2000. The
Company's annual rent for the property in 1998 was $112,346, and is subject to
annual upward adjustment. The Company also pays its pro rata share of
increases to real estate taxes and operating expenses for the property.
The Company's newly acquired subsidiary, Eclipse Information Systems,
Inc.("Eclipse"), currently occupies approximately 7,200 square feet at two
locations. Eclipse leases approximately 6,000 square feet through a sublease
that expires December 31, 2001 in Oakbrook Terrace, Illinois and approximately
1,200 square feet through a lease that expires June 24, 2003 in Independence,
Ohio. Eclipse was acquired on December 14, 1998 and the Company paid no
material rents for the Eclipse properties in 1998. If Eclipse had been
acquired on January 1, 1998, the Company's annual rent for Eclipse's
properties would have been approximately $131,000. The Eclipse properties are
subject to annual upward adjustments and Eclipse pays pro rata shares of
operating expenses for the properties.
The Company anticipates entering into new facilities and potentially
expanding its current facilities to accommodate the expected continued growth
of the Company. The Company believes that it can obtain the additional
facilities required to accommodate its projected needs without difficulty and
at commercially reasonable prices, although no assurance can be given that it
will be able to do so.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material legal proceedings except as
described below. On April 17, 1997, Alan L. Levine and Canadian Petroleum
Corporation filed suit in the Third Judicial District Court of Salt Lake
County, Utah against the Company (f/k/a Mediterranean Oil Corp., f/k/a Oryx
Gold Corp., f/k/a Pandora, Inc.) and John Does. The complaint alleges various
common law claims arising from the alleged untimely failure to remove legends
restricting the transferabilty of shares of the Company's common stock that
had been issued by the Company in payment of legal fees incurred. The
plaintiffs have computed damages in the approximate amount of $87,000. The
Company believes the complaint is without legal merit and continues to
vigorously defend itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURTIY HOLDERS.
No matters were submitted to a vote of the registrant's shareholders
during the fourth quarter of 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is quoted on the NASDAQ SmallCap Market under
the symbol "ZMAX" and the Frankfurt and Berlin exchanges under the symbol
"ZMX". From August 20, 1997 to May 18, 1998 the Company's Common Stock was
quoted on the NASD OTC Bulletin Board under the symbol "ZMAX" and prior to
August 20, 1997 the Company's Common Stock was traded on the NASD OTC Bulletin
Board under the trading symbols of "MEDO" and "ORYX".
The stock prices listed below, which have been adjusted for a 1 for 80
reverse stock split of the Company's Common Stock as of August 27, 1997,
represent the high and low closing bid prices of the Common Stock for each of
the periods indicated:
<TABLE>
<CAPTION>
1998 High Low
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<S> <C> <C>
First Quarter $ 8.11 $ 5.06
Second Quarter 10.63 5.03
Third Quarter 7.19 2.75
Fourth Quarter 5.25 2.63
1997 High Low
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First Quarter $ 4.00 $ .80
Second Quarter 4.00 1.60
Third Quarter 6.75 1.25
Fourth Quarter 16.25 5.00
</TABLE>
As of March 25, 1999 there were 153 holders of record of the Common
Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and
intends to continue this policy for the foreseeable future. ZMAX plans to
retain earnings for use in its business. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors of the Company
and will be dependent on ZMAX's results of operations, financial condition,
contractual and legal restrictions and any other factors deemed to be
relevant.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION.
The tables below present selected historical financial data of ZMAX. The
ZMAX historical data for the years ended December 31, 1998, 1997 and 1996 are
derived from the historical financial statements of ZMAX Corporation as
audited by Arthur Andersen LLP, included elsewhere in this Form 10-K.
On December 14, 1998 ZMAX acquired Eclipse Information Systems, Inc. The
accompanying financial data include the accounts of Eclipse since the date of
acquisition. A further description of this transaction is set forth in the
Form 8-K/A filed on March 1, 1999 with the Securities and Exchange Commission.
On November 6, 1996, ZMAX, which was then a shell company listed on the
OTC Bulletin Board, acquired Century Services, Inc. ("CSI"), a Maryland
corporation. CSI was a privately held company formed on December 13, 1995, to
perform computer re-engineering with a focus on providing a solution to the
Year 2000 problem. For financial reporting purposes, the acquisition has been
treated as a recapitalization of CSI with CSI as the acquiror (a reverse
acquisition). Accordingly, the historical financial statements of ZMAX prior
the November 6, 1996 are the historical financial statements of CSI. The
accompanying selected financial data include all of the accounts of CSI and
ZMAX for the period from the acquisition on November 6, 1996, through December
31, 1998. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto included
elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
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1998 1997 1996
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<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 9,916,276 $ 1,425,360 $ -
Cost of revenues 3,478,982 667,098 -
Research and development expense 473,362 - -
Sales and marketing expense 1,190,548 1,110,655 228,803
General and administrative expense 3,515,391 4,148,421 1,069,681
Employee stock compensation expense 534,384 - -
Depreciation and amortization 1,268,338 1,008,864 193,533
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Loss from operations (544,729) (5,509,678) (1,492,017)
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Other income (expense):
Interest income 270,337 137,814 14,248
Interest expense (9,140) (1,366,479) (7,125,386)
Other 821 (7,468,356) (2,903,600)
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Net loss $ (282,711) $(14,206,699) $(11,506,755)
============= ============= =============
Basic and diluted loss per share $ (0.03) $ (2.58) $ (13.45)
============= ============= =============
Basic and diluted weighted average
shares outstanding 10,638,680 5,502,668 855,712
============= ============= =============
OPERATING AND OTHER DATA
Revenues $ 9,916,276 $ 1,425,360 $ -
Cost of revenues 3,478,982 667,098 -
Gross margin 64.9% 53.2% -
EBITDA(1) 1,257,993 (4,500,814) (1,298,484)
EBITDA margin 12.7% (315.8%) -
December 31,
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1998 1997 1996
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BALANCE SHEET DATA:
Cash and cash equivalents $ 4,521,126 $ 6,405,084 $ 4,842,169
Working capital 5,563,144 5,262,151 2,725,534
Total assets 17,446,362 11,870,077 8,592,042
Total liabilities 1,666,309 2,291,697 8,172,254
Accumulated deficit (25,996,165) (25,713,454) (11,506,755)
Total stockholders' equity 15,780,053 9,578,380 419,788
</TABLE>
Notes to Selected Consolidated Financial and Operating Data:
(1) EBITDA (earnings before interest, taxes, depreciation and amortization,
and certain one-time charges), while not a measure under generally accepted
accounting principles ("GAAP"), is a standard measure of performance in many
industries. EBITDA should not be considered in isolation or as an alternative
to net income (loss), income (loss) from operations, cash flows from operating
activities, or any other measure of performance under GAAP.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
The information set forth below includes forward-looking statements.
Certain factors that could cause results to differ materially from those
projected in the forward-looking statements are set forth below. Readers are
cautioned not to put undue reliance on forward-looking statements. The Company
disclaims any intent or obligation to update publicly these forward-looking
statements, whether as a result of new information, future events or
otherwise.
OVERVIEW
ZMAX Corporation ("ZMAX" or the " Company") focuses on acquiring,
building and operating companies in the information technology ("IT")
industry. In 1996, the Company acquired all of the stock of Century Services,
Inc. ("CSI"), a corporation that provides re-engineering and information
processing services to users of large-scale computer systems in North America.
CSI currently specializes in assisting business organizations and government
agencies with what has become popularly known as the "Year 2000 problem"
("Y2K"). In December of 1998, the Company acquired all of the stock of Eclipse
Information Systems, Inc. ("Eclipse"), a corporation that provides IT
consulting services through several practice areas focused in distributed
client server technologies. In the next 12 months, the Company intends to make
additional investments in the expansion and further development of its
services and markets as it continues to combine the subsidiaries' practices
and technologies into a singular IT consulting company. The Company further
expects to devote substantial resources to developing and expanding its IT
services through additional synergistic acquisitions.
On December 14, 1998 ZMAX acquired all of the outstanding capital stock
of Eclipse. The results of operations of Eclipse are included in the financial
statements of ZMAX from the date of acquisition. Prior to the acquisition,
Eclipse was a privately held company with its headquarters in Oakbrook,
Illinois. A further description of this transaction is set forth in the Form
8-K/A filed on March 1, 1999 with the Securities and Exchange Commission.
Eclipse markets IT consulting services to a variety of commercial
companies through a series of technology practices that specialize in
delivering solutions focused in distributed client server environments.
Eclipse provides services in ERP packaged solutions, internet & intranet
solutions, network solutions, client server solutions, and AS/400 solutions.
On November 6, 1996, ZMAX acquired all of the outstanding stock of CSI.
Prior to this transaction, ZMAX had no operations and its activities consisted
of efforts to establish or acquire a new business and to raise capital. CSI
was a privately held company formed on December 13, 1995. For financial
reporting purposes, the acquisition was treated as a recapitalization of CSI
with CSI as the acquirer (a reverse acquisition). The historical financial
statements prior to November 6, 1996 are those of CSI.
CSI markets Y2K services to a variety of commercial and government
organizations. The Company believes some demand for CSI's Y2K services may
continue to exist for some time after the Year 2000, although this demand will
<PAGE>
diminish significantly over time and will eventually disappear. However, CSI's
proprietary computer software tools may be used in conversion projects
unrelated to Y2K work. CSI plans to pursue business opportunities unrelated to
the Y2K problem in the information services market and to develop products and
services to take advantage of these opportunities, such as migrating a
client's software application from a mainframe to a client-server environment.
With the recent acquisition of Eclipse, the Company believes synergistic
benefits may be realized as the two organizations further develop additional
services and technologies together.
In the next 12 months, the Company intends to integrate the services of
Eclipse's with that of CSI's and other potentially synergistic acquisitions.
Further, the Company intends to expand the services of both subsidiaries
through opening other offices in key geographic markets.
In the next 12 months, the Company intends to make additional
investments in the expansion and further development of additional IT services
and markets. In view of these investments the Company believes the
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance. Specifically, as the Company increases its investments in non Y2K
services, it will incur training, salary and other costs prior to the
recognition of related revenues. In addition, most of the Company's revenues
are expected to be derived from a relatively small number of large-scale,
comprehensive projects. Consequently, the Company's revenues and operating
results may be subject to substantial fluctuations in any given year and from
quarter to quarter.
Through December 31, 1998, the Company's revenues were generated
primarily from CSI's consulting and conversion fees and software sales related
to Y2K services. With the acquisition of Eclipse and its plans to continue to
diversify, the Company's future revenues will be less concentrated on Y2K
services.
Most of the Company's current cost structure is fixed. Expenses consist
primarily of the salaries and benefits paid to the Company's technical,
marketing and administrative personnel. Amortization and depreciation expenses
relate to property, equipment and intangible assets. As a result of its plan
to expand its operations through internal growth and acquisitions the Company
expects these costs to increase.
The Company's profitability depends upon both the volume of service and
the Company's ability to manage costs. Because a significant portion of the
Company's cost structure is fixed, the Company must effectively manage these
costs to achieve profitability. In addition, certain of the Company's projects
are priced on a fixed fee basis. The profitability on an individual fixed fee
project depends upon completing the project within the estimated number of
staff hours and within the agreed upon time frame. To date, the Company has
been able to maintain its operating margins through efficiencies achieved by
the use of the Company's proprietary software tools, by completing fixed fee
projects within budget, by offsetting increases in consultant salaries with
increases in consultant fees, and by effectively managing general overhead
costs.
<PAGE>
RECENT DEVELOPMENTS
ECLIPSE ACQUISITION:
On December 14, 1998, the Company acquired all of the outstanding stock
of Eclipse in a transaction accounted for as a purchase. The Company acquired
the stock of Eclipse for $1,450,000 in cash and 1,700,000 shares of the
Company's common stock. The Company also incurred approximately $325,000 in
direct acquisition costs.
The unaudited pro forma data presented below reflects the acquisition of
Eclipse as if it had occurred on January 1, 1997. The pro forma results are
not necessarily indicative of future results of operations or of what would
have occurred had the acquisition actually been consummated on that date.
<TABLE>
<CAPTION>
December 31
-----------------------------------
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Revenues $ 17,982,127 $ 6,805,439
Cost of Revenues 8,217,220 4,051,278
Gross margin 54.3% 40.5%
EBITDA(1) 2,345,890 (3,607,544)
EBITDA margin 13.0% (53.0%)
Net income (loss) 177,885 (14,075,429)
Basic and diluted income (loss) per share $0.01 $(1.95)
<FN>
(1) EBITDA (earnings before interest, taxes, depreciation and amortization,
and certain one-time charges), while not a measure under generally accepted
accounting principles ("GAAP"), is a standard measure of performance in many
industries. EBITDA should not be considered in isolation or as an alternative
to net income (loss), income (loss) from operations, cash flows from operating
activities, or any other measure of performance under GAAP.
</FN>
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for the year ended December 31, 1998, were
approximately $9.9 million, an increase of approximately $8.5 million over
revenues of approximately $1.4 million for the year ended December 31, 1997.
The increase was primarily attributable to increased sales of Y2K remediation
and consulting services by CSI during 1998 as compared to 1997. To a lesser
extent, the increased revenues during 1998 were attributable to the Company's
first license of its proprietary Y2K software and the revenue generated by
Eclipse since the date of acquisition, December 14, 1998.
GROSS PROFIT. Gross profit for the year ended December 31, 1998, was
approximately $6.4 million, or 64.9% of revenues, an increase of approximately
<PAGE>
$5.7 million over gross profit of approximately $0.7 million, or 53.2% of
revenues, for the year ended December 31, 1997. The increase was attributable
to increased revenues and greater realized economies of scale and efficiencies
during 1998 as compared to 1997, during which the Company had just commenced
operations.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 1998, were approximately $0.5 million, or 4.8% of revenues.
No research and development expenses were incurred during the year ended
December 31, 1997. The Company initiated efforts during 1998 to refine its Y2K
toolset and to prepare the toolset for potential licensing to end-users. In
the fourth quarter of 1998, the Company entered into its first licensing
agreement for the Y2K toolset. The Company expects to continue to market the
licensing of the Y2K toolset during 1999.
SALES AND MARKETING. Sales and marketing expenses for the year ended
December 31, 1998 were approximately $1.2 million, or 12.0% of revenues, an
increase of approximately $0.1 million, from the $1.1 million of such
expenses, or 77.9% of revenues, for the year ended December 31, 1997. The
increase in sales and marketing expenses for the year ended December 31, 1998
was primarily attributable to increased commission expenses and further
investments in marketing efforts in 1998. These increases were partially
offset by a reduction in severance costs incurred in the year ended December
31, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
year ended December 31, 1998 were $3.5 million, or 35.5% of revenues, a
decrease of $0.6 million, as compared to $4.1 million of such expenses, or
291.0% of revenues, for the year ended December 31, 1997. The decrease in
general and administrative expenses in 1998 was primarily attributable to a
decrease in professional and consulting expenses.
INTEREST INCOME (EXPENSE). Interest income for the year ended December
31, 1998 was approximately $0.3 million, an increase of approximately $0.2
million as compared to approximately $0.1 million of such interest income, for
the year ended December 31, 1997. The increase in interest income in 1998 was
primarily attributable to greater amounts of invested cash. The Company had no
material interest expense for year ended December 31, 1998. Interest expense
for the year ended December 31, 1997 was approximately $1.4 million. The
decrease in interest expense in 1998 was primarily attributable to repayment
of the Company's long-term debt and the elimination of interest expense
related to the amortization of the deferred financing costs and the discount
on the Company's convertible notes.
EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION, AND
CERTAIN ONE-TIME CHARGES). As a result of the above, the EBITDA for the year
ended December 31, 1998 was approximately $1.3 million. This represented an
increase of approximately $5.8 million as compared to negative EBITDA of
approximately $(4.5) million for the year ended December 31, 1997. The loss
from operations for the year ended December 31, 1998, included a one-time
charge of approximately $0.5 million for employee stock compensation. This
charge related to the contribution of shares of common stock to the Company by
certain stockholders and the re-issuance of that stock to an employee as
consideration for services. This transaction was not dilutive and did not
impact the Company's cash flows or financial position and may result in a
<PAGE>
future tax benefit for the Company.
NET INCOME(LOSS). As a result of the above, the net loss for the year
ended December 31, 1998 was approximately $0.3 million, a decrease of
approximately $13.9 million, as compared to the net loss of approximately
$14.2 million for the year ended December 31, 1997. Net income, excluding the
one-time charge for the year ended December 31, 1998, was approximately $0.3
million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Prior to the CSI transaction, ZMAX was a development stage company whose
activities consisted of efforts to establish a new business and raise capital.
For financial reporting purposes, the CSI transaction has been treated as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition). The
historical financial statements including the results of operations prior to
November 6, 1996 are those of CSI.
The net loss for the year ended December 31, 1997, was $14.2 million, or
$2.58 per share. The loss was primarily related to the recapitalization of CSI
and the further development of operations and infrastructure by CSI. Included
in the loss were several significant non-cash charges including approximately
$7.4 million in other charges related to the conversion of debentures,
approximately $0.6 million in interest charges were recorded related to the
amortization of the discount on the Company's $2.1 million convertible notes
that resulted from an allocation of the proceeds of the debt to additional
paid-in capital to reflect the beneficial conversion feature on the debt,
approximately $1.5 million in amortization of intangibles and deferred
financing costs was recorded, and approximately $0.5 million in non-employee
stock compensation was charged to expense. The Company also recognized a loss
of approximately $0.1 million upon the conversion of a promissory note into
common stock. The remaining operating loss reflects the costs related to the
increased operations of CSI and fees and expenses associated with the CSI
transaction and related financing. During the year ended December 31, 1997,
the Company recognized revenues totaling $1.4 million related to Y2K services.
CSI was formed on December 13, 1995. Its 1995 activities were limited to
acquiring the rights to two of its software tools. In 1996, the Company
incurred a net loss of $11.5 million, or $13.45 per share. No revenues were
generated during 1996. Included in the loss were several significant non-cash
charges including approximately $2.9 million of expense related to the CSI
transaction, approximately $7.0 million in interest charges related to the
amortization of the discount on the Company's convertible debt that resulted
from an allocation of the proceeds of the debt to additional paid-in capital
to reflect the beneficial conversion feature on the convertible debt,
approximately $0.4 million in amortization of intangibles and deferred
financing costs, and approximately $0.3 million in non-employee stock
compensation expense. The remaining expenses were primarily attributable to
the salaries and benefits paid to the Company's technical, marketing and
administrative personnel along with other marketing and administrative
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has, since inception, financed its operations and capital
expenditures through the sale of common stock, convertible notes, convertible
<PAGE>
exchangeable debentures, the proceeds from the exchange offer and the exercise
of the warrants related to the convertible exchangeable debentures. Cash
provided by operating activities for the year ended December 31, 1998 was $0.4
million, an increase of $4.2 million over the cash used in operating
activities of $3.8 million for the year ended December 31, 1997. Total cash
used for the year ended December 31, 1998 was approximately $1.9 million, as
compared to cash generated of approximately $1.6 million for the year ended
December 31, 1997. The cash used during the year ended December 31, 1998 was
primarily a result of the $1.6 million in cash used for the acquisition of
Eclipse. Capital expenditures on property and equipment were approximately
$0.1 million for the year ended December 31, 1998, as compared to
approximately $0.3 million during the year ended December 31, 1997. The
decrease in capital expenditures during 1998 was related primarily to the
completion of the start-up equipment requirements of the Company.
As of December 31, 1998, the Company had working capital of
approximately $5.6 million. The Company's primary source of liquidity consists
of approximately $4.5 million in cash and cash equivalents and approximately
$2.5 million of accounts receivable.
The market for the Company's products is expanding and the Company's
business environment is characterized by rapid technological changes. The
Company requires substantial working capital to fund its business,
particularly to finance accounts receivable, sales and marketing efforts,
research and development, and capital expenditures. The Company currently has
no material commitments for capital expenditures. The Company's future capital
requirements will depend on many factors including the rate of revenue growth,
if any, the timing and extent of spending to support research and development,
technological changes and market acceptance of the Company's services. The
Company believes that its current cash position is sufficient to meet its
capital expenditure and working capital requirements for the near term;
however, the Company's revenue growth and technological change make it
difficult for the Company to predict future liquidity requirements with
certainty. Over the longer term, the Company must successfully execute its
plans to generate significant positive cash flows if it is to sustain adequate
liquidity without impairing growth or requiring the infusion of additional
funds from external sources. Additionally, a major expansion, such as would
occur with the acquisition of a major new subsidiary, might also require
external financing that could include additional debt or equity capital. There
can be no assurance that additional financing, if required, will be available
on acceptable terms, if at all.
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company have generally been offset by increased
prices of products and services sold.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company is an information technology ("IT") company which is in the
business of performing evaluation, testing and re-engineering services in
<PAGE>
providing solutions to the Y2K problem. The Company owns, markets, utilizes
and licenses the use by others of its proprietary Y2K software re-engineering
tools and methodologies. The Company's management believes that its operating
and information systems are Y2K compliant. The Company expects no material
impact on its operating and information systems from the Y2K issue.
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues and
profitability. Actual results may differ materially from projected or expected
results due to changes in the demand for the Company's products and services,
uncertainties relating to the results of operations, dependence on its major
customers, risks associated with rapid technological change and the emerging
services market, potential fluctuations in quarterly results, and its
dependence on key employees and other risks and uncertainties affecting the
technology industry generally. The Company disclaims any intent or obligation
to up-date publicly these forward-looking statements, whether as a result of
new information, future events or otherwise.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The consolidated financial statements and schedules required hereunder
and contained herein are listed under Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instructions G(3) of Form 10-K, the information
called for by this Item regarding directors is hereby incorporated by
reference from the Company's definitive proxy statement or amendment hereto to
be filed pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report. Information regarding the Company's
executive officers is set forth under Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) of Form 10-K, the information
called for by this item hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) of Form 10-K, the information
called for by this item hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) of Form 10-K, the information
called for by this item hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
(1) FINANCIAL STATEMENTS:
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years
Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flow for the Years
Ended December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENTS SCHEDULE:
Report of Independent Accountants
Schedule II - Valuation and qualifying accounts
All other schedules are omitted either because they are not applicable or
required, or because the required information is included in the financial
statements or notes thereto:
(b) REPORTS ON FORM 8-K
On December 29, 1998, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting its acquisition on December 14, 1998,
of Eclipse Information Systems, Inc. On March 1, 1999, the Company filed
an amendment to that Form 8-K setting forth historical and pro forma
financial information relating to that acquisition.
<PAGE>
(c) EXHIBITS: The following exhibits are filed herewith or incorporated
herein by reference:
Exhibit No. Description
----------- -----------
2.1 Stock Purchase Agreement among ZMAX Corporation, Michael C.
Higgins and Michael S. Cannon, dated November 6, 1996, for
the acquisition of Century Services, Inc. (Incorporated
herein by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
2.2 Agreement and Plan of Merger between ZMAX Corporation and
New ZMAX Corporation, dated June 10, 1997. (Incorporated
herein by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
3.1 Amended and Restated Certificate of Incorporation of ZMAX
Corporation. (Incorporated herein by reference to Exhibit
3.5 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)
3.2 Bylaws of ZMAX Corporation. (Incorporated herein by
reference to Exhibit 3.6 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)
4.1 Form of Warrant to Purchase Common Stock of ZMAX
Corporation. (Incorporated herein by reference to Exhibit
4.2 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)
10.1 ZMAX Corporation 1997 Stock Incentive Plan. (Incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
10.2 Form of ZMAX Corporation 1997 Non-qualified Stock Option
Award (form of grant and vesting schedule). (Incorporated
herein by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
10.3 ZMAX Corporation 1997 Directors Formula Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.4 Form of ZMAX Corporation Directors Formula Stock Option
Award (form of grant and vesting schedule). (Incorporated
herein by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
* Management contract or compensatory plan.
<PAGE>
10.5 Employment Agreement between Century Services, Inc. and
Michael C. Higgins, dated November 6, 1996. (Incorporated
herein by reference to Exhibit 10.5 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
10.6 First Amendment to the Employment Agreement between Century
Services, Inc. and Michael C. Higgins, dated May 21, 1997.
(Incorporated herein by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.7 Employment Agreement between Century Services, Inc. and
Joseph Yeh, dated June 18, 1997. (Incorporated herein by
reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)*
10.8 Separation Agreement between Century Services, Inc. and
Michael S. Cannon, dated April 22, 1997. (Incorporated
herein by reference to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
10.9 Consulting Agreement among ZMAX Corporation, MBY, Inc. and
Michel Berty, dated April 1, 1997. (Incorporated herein by
reference to Exhibit 10.9 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)*
10.10 Consulting Agreement among ZMAX Corporation, Wareham
Management Ltd. and G.W. Norman Wareham, dated May 30, 1997.
(Incorporated herein by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.11 Consulting Agreement between ZMAX Corporation and Shafiq
Nazerali, dated May 30, 1997. (Incorporated herein by
reference to Exhibit 10.11 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)*
10.12 Earn Out Stock Escrow Agreement among ZMAX Corporation,
Michael C. Higgins, Michael S. Cannon and Powell, Goldstein,
Frazer & Murphy, dated November 6, 1996. (Incorporated
herein by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
10.13 ZMAX Corporation Stockholders Agreement among Michael C.
Higgins, Michael S. Cannon and ZMAX Corporation, dated
November 6, 1996. (Incorporated herein by reference to
Exhibit 10.13 to the Registrant's Registration Statement on
Form S-4 (File No. 333-29833).)
* Management contract or compensatory plan.
<PAGE>
10.14 Stock Pledge and Security Agreement from Michael C. Higgins
in favor of ZMAX Corporation, dated November 6, 1996.
(Incorporated herein by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
10.15 Letter Agreement among ZMAX Corporation, IMS International,
Inc., Wan Hsien Information International Corporation, Ltd.,
Multi-Dimension International, and Institute for Information
Industry Regarding the Purchase by ZMAX Corporation of the
"COCACT" Software Program, dated April 30, 1997.
(Incorporated herein by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
10.16 Letter Agreement between ZMAX Corporation and Institute for
Information Industry Regarding the Purchase by ZMAX
Corporation of the "COCACT" Software Program, dated April
30, 1997. (Incorporated herein by reference to Exhibit 10.16
to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)
10.17 Letter Agreement between ZMAX Corporation and Wan Hsien
Information International Corporation Ltd. Regarding the
Purchase by ZMAX Corporation of the "COCACT" Software
Program, dated April 30, 1997, as amended. (Incorporated
herein by reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
10.18 Conversion Agreement between Fiserv Federal Systems, Inc.
and ZMAX Corporation, dated April 28, 1997. (Incorporated
herein by reference to Exhibit 10.18 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
10.19 Agreement between ZMAX Corporation and Investor
Communications Company, LLC, dated as of May 20, 1997.
(Incorporated herein by reference to Exhibit 2.2 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
10.20 Investor Relations Consulting Agreement between ZMAX
Corporation and Investor Communications Company, LLC, dated
as of May 20, 1997. (Incorporated herein by reference to
Exhibit 10.20 to the Registrant's Registration Statement on
Form S-4 (File No. 333-29833).)
10.21 Agreement and Plan of Merger, dated as of December 14, 1998,
by and among ZMAX Corporation, Eclipse Acquisition
Corporation, Eclipse Information Systems, Inc., and Frank
Schultz, Mark Mirabile, John Schultz, Scott Shedd, Brad
Adams, Ron Hilicki, Fred Anderson, Harold Zimmerman, Chris
Gildone, Dave Vittitow, Kristina Palmer, Tom Carroll and
Gary Singer. (Incorporated herein by reference to Exhibit 2
to the Registrant's Current Report on Form 8-K, as filed on
December 29, 1998 (File No. 333-55993).)
21 Subsidiaries of ZMAX Corporation
23 Report of Arthur Andersen LLP
24 Schedule II Valuation and Qualifying accounts
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZMAX Corporation
Date: March 30, 1999 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
President
Date: March 30, 1999 /s/JAMES T. MCCUBBIN
--------------------
James T. Mccubbin
Vice President - Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 30, 1999 /s/MELVIN A. MCCUBBIN
---------------------
Melvin A. Mccubbin
Director and Chairman of the Board
Dated: March 30, 1999 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
Director, President and Chief Executive
Officer
Dated: March 30, 1999 /s/JAMES T. MCCUBBIN
--------------------
James T. Mccubbin
Director, Vice President - Chief Financial
Officer, Assistant Secretary and Treasurer
Dated: March 30, 1999 /s/G.W. NORMAN WAREHAM
----------------------
G.w. Norman Wareham
Director, Secretary and Treasurer
Dated: March 30, 1999 /s/STEVE L. KOMAR
-----------------
Steve L. Komar
Director
Dated: March 30, 1999 /s/FRANCIS T. SCHULTZ
---------------------
Francis T. Schultz
Director and Vice President
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Arthur Andersen LLP, Independent Public
Accountants F-1
Consolidated Balance Sheets as of December 31, 1998
and 1997 F-2
Consolidated Statements of Operations for the Years
Ended December 31, 1998, 1997, and 1996 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1998, 1997,
and 1996 F-5
Consolidated Statements of Cash Flow for the Years
Ended December 31, 1998, 1997, and 1996 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ZMAX Corporation:
We have audited the accompanying consolidated balance sheets of ZMAX
Corporation (a Delaware corporation) and its subsidiaries as of December 31,
1998 and 1997 and the related statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ZMAX Corporation, as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 5, 1999
F-1
<PAGE>
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
-------------------------
ASSETS:
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,521,126 $ 6,405,084
Accounts receivable, net of
allowance of $17,160 and $0, respectively 2,545,659 1,067,258
Prepaid expenses and other assets 127,952 81,506
------------ ------------
Total current assets 7,194,737 7,553,848
Property and equipment, net 477,870 277,981
Intangible assets, net 9,740,217 4,033,265
Other assets 33,538 4,983
------------ ------------
Total assets $17,446,362 $11,870,077
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
F-2
<PAGE>
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
LIABILITIES & STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 1,596,074 $ 826,117
Current portion of capital lease obligation 35,519 -
Current portion of long-term debt - 539,541
Customer deposits - 926,039
------------- -------------
Total current liabilities 1,631,593 2,291,697
Capital lease obligation, net of current portion 34,716 -
------------- -------------
Total liabilities 1,666,309 2,291,697
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000
shares authorized, None issued and outstanding - -
Common stock, $0.001 par value, 50,000,000
shares authorized, 13,117,214 and 11,729,714
shares issued and outstanding as of December 31,
1998 and December 31, 1997, respectively,
167,301 and 479,801 shares subject to
cancellation agreements as of December 31, 1998
and December 31, 1997, respectively (Note 8) 13,117 11,729
Additional paid-in capital 41,763,101 35,280,105
Accumulated deficit (25,996,165) (25,713,454)
------------- -------------
Total stockholders' equity 15,780,053 9,578,380
------------- -------------
Total liabilities & stockholders' equity $ 17,446,362 $ 11,870,077
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
F-3
<PAGE>
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 9,916,276 $ 1,425,360 $ -
Operating expenses:
Cost of revenues 3,478,982 667,098 -
Research and development 473,362 - -
Sales and marketing 1,190,548 1,110,655 228,803
General and administrative 3,515,391 4,148,421 1,069,681
Employee stock compensation expense 534,384 - -
Depreciation and amortization 1,268,338 1,008,864 193,533
------------- ------------- -------------
Loss from operations (544,729) (5,509,678) (1,492,017)
Other income (expenses):
Interest income 270,337 137,814 14,248
Interest expense (9,140) (1,366,479) (7,125,386)
Other 821 (7,468,356) (2,903,600)
------------- ------------- -------------
Net loss $ (282,711) $(14,206,699) $(11,506,755)
============= ============= =============
Basic and diluted loss per share $ (0.03) $ (2.58) $ (13.45)
============= ============= =============
Basic and diluted weighted average shares outstanding 10,638,680 5,502,668 855,712
============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-4
<PAGE>
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Aditional Issuable
------------------------ Paid-In Common
Shares Amount Capital Stock
----------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 3,200,000 $ 3,200 $ (3,000) $ -
Adjustment to record existing capitalization of public
shell company November 6, 1996, 234,365 shares issuable 3,800,079 3,800 807,964 1,373,379
Common stock issuable in connection with the CSI
recapitalization, 320,000 shares - - - 1,875,200
Common stock issuable in connection with the CSI
recapitalization, 350,000 shares, net of subscription
proceeds - - - 2,051,000
Options granted for services - - 300,000 -
Allocation of proceeds of Notes to beneficial
conversion feature 120,000
Allocation of proceeds of Debentures to beneficial
conversion feature - - 5,500,000 -
Net loss - - - -
----------- --------- ------------- ------------
Balance, December 31, 1996 7,000,079 7,000 6,724,964 5,299,579
Cancellation of shares (296,007) (296) 296 -
Conversion of Notes 1,600,000 1,600 2,098,400 -
Settlement of a note for common stock 32,077 32 507,186 -
Common stock issued in COCACT purchase 150,000 150 1,931,100 -
Common stock issued for services 60,000 60 547,440 -
Issuance of previously issuable shares 904,365 904 5,298,675 (5,299,579)
Exchange of Debentures and exercise of warrants 2,279,200 2,279 18,172,044 -
Net loss - - - -
----------- --------- ------------- ------------
Balance, December 31, 1997 11,729,714 11,729 35,280,105 -
Cancellation of shares (312,500) (312) 312 -
Employee stock compensation - - 534,384 -
Common stock issued in Eclipse acquisition 1,700,000 1,700 5,948,300 -
Net loss - - - -
----------- --------- ------------- ------------
Balance, December 31, 1998 13,117,214 $ 13,117 $ 41,763,101 $ -
=========== ========= ============= ============
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS' EQUITY (Continued)
Receivable for
Stock Accumulated
Subscription Deficit Total
-------------- --------------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ (200) $ - $ -
Adjustment to record existing capitalization of public
shell company November 6, 1996, 234,365 issuable 200 - 2,185,343
Common stock issuable in connection with the CSI
recapitalization, 320,000 shares - - 1,875,200
Common stock issuable in connection with the CSI
recapitalization, 350,000 shares, net of subscription
proceeds (105,000) - 1,946,000
Options granted for services - - 300,000
Allocation of proceeds of Notes to beneficial
conversion feature 120,000
Allocation of proceeds of Debentures to beneficial
conversion feature - - 5,500,000
Net loss - (11,506,755) (11,506,755)
--------- ------------- -------------
Balance, December 31, 1996 (105,000) (11,506,755) 419,788
Cancellation of shares - - -
Conversion of Notes - - 2,100,000
Settlement of a note for common stock - - 507,218
Common stock issued in COCACT purchase - - 1,931,250
Common stock issued for services - - 547,500
Issuance of previously issuable shares 105,000 - 105,000
Exchange of Debentures and exercise of warrants - - 18,174,323
Net loss - (14,206,699) (14,206,699)
--------- ------------- -------------
Balance, December 31, 1997 - (25,713,454) 9,578,380
Cancellation of shares - - -
Employee stock compensation - - 534,384
Common stock issued in Eclipse acquisition - - 5,950,000
Net loss - (282,711) (282,711)
--------- ------------- -------------
Balance, December 31, 1998 $ - $(25,996,165) $ 15,780,053
========= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-5
<PAGE>
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------------------------------------
1998 1997 1996
Cash flows from operating activities: ---- ---- ----
<S> <C> <C> <C>
Net loss $ (282,711) $(14,206,699) $(11,506,755)
Adjustments to reconcile loss to net cash provided by
(used in) operating activities
Depreciation and amortization expense 1,315,154 1,008,864 193,533
Amortization of deferred financing costs - 508,363 185,767
Amortization of discount on Notes and Debentures - 591,408 7,008,592
Non-cash expenses related to CSI recapitalization - - 2,883,600
Expenses related to conversion of debentures - 7,370,000 -
Stock compensation expense 534,384 547,500 300,000
Non-cash interest expense on promissory note - 8,904 -
Loss on conversion of promissory note - 101,442 -
Changes in assets and liabilities:
Accounts receivable (73,715) (1,067,258) -
Prepaid expenses and other assets (15,604) (58,727) (27,762)
Accounts payable and accrued expenses (138,405) 455,942 55,570
Customer deposits (926,036) 926,039 -
------------ -------------- ------------
Net cash provided by (used in) operating activities $ 413,067 $ (3,814,222) $ (907,455)
------------ -------------- ------------
Net cash used in investing activities:
Purchase of Eclipse, net of cash acquired (1,647,644) - -
Purchases of property and equipment (109,837) (326,145) (21,144)
Purchase of software - (767,379) (831,892)
------------ -------------- ------------
Net cash used in investing activities $(1,757,481) $ (1,093,524) $ (853,036)
------------ -------------- ------------
Net cash provided by financing activities:
Proceeds from issuance of Notes - - 120,000
Proceeds from issuance of Debentures - - 5,500,000
Deferred financing costs - - (675,000)
Cash acquired in CSI recapitalization - - 299,173
Advances from joint venture and ZMAX prior to the
CSI recapitalization - - 950,000
Proceeds from the issuance of common stock - 105,000 -
Net proceeds from the Exchange and exercise of warrants - 6,234,607 -
Net borrowings (payments) on long-term obligations (539,541) 131,054 408,487
------------ -------------- ------------
Net cash (used in) provided by financing activities $ (539,541) $ 6,470,661 $ 6,602,660
------------ -------------- ------------
F-6
<PAGE>
Net (decrease) increase in cash $(1,883,955) $ 1,562,915 $ 4,842,169
------------ -------------- ------------
Cash, beginning of period $ 6,405,084 $ 4,842,169 $ -
------------ -------------- ------------
Cash, end of period $ 4,521,129 $ 6,405,084 $ 4,842,169
============ ============== ============
Supplemantal cash flow information:
Cash paid for-
Interest $ 27,125 $ 299,668 $ 26,599
Income taxes $ - $ - $ -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
F-7
<PAGE>
ZMAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS:
Basis of Presentation
On November 6, 1996, ZMAX Corporation ("ZMAX" or the "Company"), which was
then a shell company listed on the OTC Bulletin Board, acquired 100% of the
outstanding common stock of Century Services, Inc. ("CSI"), a Maryland
corporation. CSI was a privately held company formed on December 13, 1995, to
perform computer re-engineering with a focus on providing a solution to the
Year 2000 problem.
For financial reporting purposes, the acquisition has been treated as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition).
Accordingly, the historical financial statements of ZMAX prior to November 6,
1996, are the historical financial statements of CSI. The accompanying
consolidated financial statements include all of the accounts of CSI and the
accounts of ZMAX since the acquisition on November 6, 1996. On December 14,
1998, ZMAX acquired Eclipse Information Systems, Inc. ("Eclipse"). The
accompanying consolidated financial statements include the accounts of Eclipse
since the date of acquisition. All significant inter-company amounts have been
eliminated.
Merger (the "Merger")
In December 1997, ZMAX (a Nevada corporation) merged with and into New ZMAX
Corporation, a Delaware corporation ("New ZMAX"), pursuant to an Agreement and
Plan of Merger between ZMAX and New ZMAX (the "Merger Agreement"). At the time
the Merger became effective, each outstanding share of common stock, $0.001
par value, of ZMAX was converted into one share of common stock, $0.001 par
value, of New ZMAX. New ZMAX is the surviving corporation in the Merger. At
the effective time of the Merger, the name of New ZMAX was changed to "ZMAX
Corporation" pursuant to the Merger Agreement.
Natyre Of Operations
Prior to the CSI transaction, ZMAX's activities consisted of efforts to
establish a new business and raise capital. The operations of CSI consisted of
activities to obtain financing, to acquire and develop its proprietary Year
2000 software re-engineering tools and methodologies, and to market its
services to potential customers. Since the acquisition of CSI, the Company has
been focused on the software re-engineering market. During 1998 and 1997, the
Company's revenue was derived primarily from Year 2000 services. The Company
also began licensing a Year 2000 software tool during 1998; however, such
F-8
<PAGE>
licensing revenue was not significant in 1998. While the Company's revenue to
date has been derived primarily from its Year 2000 or "millennium" services
there can be no assurance that the Company will continue to be successful in
completing large-scale conversions or that the Company will not experience
delays or failures in providing its millennium services. The failure of the
Company's Year 2000 methodology to function properly or the existence of
significant errors or problems following completion of millennium conversions
could necessitate significant expenditures by the Company to remedy the
problem. The consequences of failures, errors or problems could materially and
adversely affect the Company's business, operating results and financial
condition.
In December 1998, the Company expanded its operations through the acquisition
of Eclipse. Eclipse performs management and information systems consulting
services. Eclipse also resells certain hardware and software products to its
customers.
The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology, uncertain and undeveloped
markets for millennium services, current and potential competitors with
greater financial, technological, production and marketing resources, reliance
on certain significant customers, the need to develop additional products and
services, limited protection of proprietary information, the risk of third
party claims of infringement, potential contract liability related to the
Company's access to key aspects of customers computer systems, dependence upon
strategic alliances, the need for additional technical personnel, dependence
on key management personnel, management of growth, uncertainty of future
profitability and possible fluctuations in financial results. The Company may
also require additional capital that may not be available to it. In addition,
there are risks associated with the market activity in ZMAX common stock.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Investments with original maturities of three months or less are considered
cash equivalents for purposes of these financial statements. At December 31,
1998, cash and cash equivalents included $3,611,339 of investments in a money
market fund that invests in short-term U.S. Government securities.
F-9
<PAGE>
Revenue Recognition
Revenue on time-and-materials contracts is recognized based upon hours
incurred at contract rates plus direct costs. Revenue on fixed-price contracts
is recognized on the percentage-of-completion method based on costs incurred
in relation to total estimated costs. Anticipated losses are recognized as
soon as they become known. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Revenue
from the resale of hardware and software products is recognized upon shipment.
Unbilled accounts receivable on time and materials contracts represent costs
incurred and gross profit recognized near the period end but not billed until
the following period. Unbilled accounts receivable on fixed-price contracts
consist of amounts incurred which are not yet billable under contract terms.
At December 31, 1998 and 1997, unbilled accounts receivable totaled $410,178
and $180,120, respectively.
Revenue from the sale of perpetual and term software licenses is recognized at
the time of delivery and acceptance of software products by the customer,
provided that no significant vendor obligations remain and that collection is
probable. Maintenance revenue that is bundled with an initial license fee is
deferred and recognized ratably over the maintenance period. Amounts deferred
for maintenance are based on the fair value of equivalent maintenance services
sold separately. The American Institute of Certified Public Accountants issued
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), which
superceded Statement of Position 91-1 "Software Revenue Recognition." SOP 97-2
provides additional guidance with respect to multiple element arrangements;
returns, exchanges, and platform transfer rights; resellers; services; funded
software development arrangements; and contract accounting. The Company
recognizes revenue in accordance with SOP 97-2 and Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions". Prior to 1998, the Company had no revenue from the
license of software.
Significant Customers
During 1998, three customers individually represented 41%, 18% and 11% of
revenue. During 1997, three customers individually represented 24%, 23% and
13% of revenue. Due to the nature of the Company's business and the relative
size of certain contracts, the loss of any single significant customer could
have a material adverse effect on the Company's results of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist of cash and cash equivalents and accounts receivable. Accounts
receivable include amounts due from relatively large companies in a variety of
industries. As of December 31, 1998, two customers individually represented
F-10
<PAGE>
16% and 13% of accounts receivable. As of December 31, 1997, three customers
individually represented 31%, 31% and 17% of accounts receivable.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No.109, deferred tax assets and liabilities are computed based on
the difference between the financial statement and income tax bases of assets
and liabilities using the enacted marginal tax rate. SFAS No. 109 requires
that the net deferred tax asset be reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not that some
portion or all of the net deferred tax asset will not be realized.
Property and Equipment
Property and equipment is carried at cost and depreciated over its estimated
useful life, typically three years, using the straight-line method. Leasehold
improvements are depreciated using the straight-line method over their
estimated useful life or the remaining term of the lease, whichever is
shorter.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Furniture and fixtures $ 397,600 $ 147,653
Equipment 243,685 162,562
Leasehold improvements 44,151 37,075
Less-Accumulated depreciation (207,566) (69,309)
---------- ----------
$ 477,870 $ 277,981
========== ==========
</TABLE>
Software Development Costs
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed," requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. Amounts that could have been capitalized under this statement
were immaterial and have not been capitalized.
Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment,
identifiable intangibles, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
F-11
<PAGE>
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of the assets.
Basic and Diluted Net Loss Per Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 requires dual presentation of
basic and diluted earnings per share. Basic income or loss per share includes
no dilution and is computed by dividing net income or loss by the weighted
average number of common shares outstanding for the period. Diluted income or
loss per share includes the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock. The treasury stock effect of options and warrants to purchase
1,714,300, 1,488,800 and 208,126 shares of common stock outstanding at
December 31, 1998, 1997, and 1996, respectively, has not been included in the
calculation of the net loss per share as such effect would be anti-dilutive.
Similarly, because the effect would have been anti-dilutive, common stock
issuable upon the conversion of the Company's convertible debt were not
included in the calculation of diluted loss per share for 1997 and 1996.
Outstanding shares subject to cancellation agreements have not been included
in either the basic or diluted calculation. As a result, the basic and diluted
loss per share for all periods presented are identical.
New Accounting Pronouncements
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The adoption of SFAS
No. 130 did not have a material impact on the Company's results of operations,
financial position, or cash flows.
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 has had no impact on the Company's results of
operations, financial position or cash flows.
In March 1998, the AICPA issued Statement of Position 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", ("SOP
98-1"). SOP 98-1 requires the Company to capitalize internal computer software
costs once the capitalization criteria of the SOP are met. SOP 98-1 is
effective January 1, 1999, and is applied to all projects in progress upon the
initial application of the SOP. The Company has not yet determined the impact
of the adoption of SOP 98-1, however, a percentage of the Company's historical
development expenses may now be required to be capitalized under SOP 98-1.
F-12
<PAGE>
3. ACQUISITION OF JOINT VENTURE INTEREST AND CSI RECAPITALIZATION:
In connection with the recapitalization of CSI, ZMAX issued 2,800,000 shares
of common stock at $0.30 per share (Note 8), $2,100,000 of convertible notes
(Note 6) and $5,500,000 of convertible exchangeable subordinated debentures
(Note 6).
Fiserv Century Services Joint Venture
On April 17, 1996, CSI formed the Fiserv Century Services Joint Venture (the
"JV") with Fiserv Federal Systems, Inc., ("Fiserv"). CSI and Fiserv each owned
a 50 percent interest in the JV. The JV was engaged in the business of
marketing Year 2000 computer consulting services using computer software
exclusively licensed to CSI. As funding for the JV, Fiserv agreed to provide a
credit facility of up to $5,000,000. All funds advanced to the JV were
provided under this facility. In addition, the JV agreed to provide monthly
advances to CSI in the amount of $40,000 with a limit of $720,000. During the
period from April 1996 to August 1996, Fiserv provided a total of $695,000 in
funding to the JV, $560,000 of which the JV advanced to CSI under the terms of
the agreements described above.
As part of the CSI recapitalization, Fiserv agreed to sell its interest in the
JV to ZMAX. Effective September 1, 1996, NewDominion Capital Group, Inc.
("NewDominion") acquired Fiserv's interest in the JV. At this time, all
employees and operations of the JV were transferred to CSI. NewDominion's
intent was to serve as an intermediary in order to assign the joint venture
interest to ZMAX concurrent with the recapitalization of CSI. Fiserv's
interest was assigned to NewDominion for cash consideration of $310,000 and a
promissory note of $385,000. In addition to the above consideration, Fiserv
was pledged 3 percent of the outstanding shares of the anticipated successor
entity to the JV. On September 20, 1996, NewDominion assigned its interest in
the JV to ZMAX. As consideration for the assignment, ZMAX assumed all
liabilities, interests, and obligations of NewDominion related to the JV
including the $310,000 payable to Fiserv and the $385,000 promissory note. As
the successor entity (as described above), ZMAX assumed the obligation to
issue a 3 percent ownership interest in ZMAX to Fiserv.
This transaction has been accounted for as a purchase by ZMAX. ZMAX acquired
the 50 percent interest in the JV for repayment of the amounts advanced by
Fiserv to the JV totaling $695,000 ($310,000 in cash and $385,000 note
payable) and 234,365 shares of ZMAX common stock with a fair value of
$1,373,379 based upon the quoted market price of ZMAX common stock. The
234,365 shares of common stock were not issued until April 1997 and have been
reflected as issuable as of December 31, 1996. ZMAX allocated the purchase
price to assets and liabilities based on their estimated fair values at the
F-13
<PAGE>
date of acquisition (prior to the CSI transaction). As a result, ZMAX (prior
to the CSI transaction) allocated $1,508,379 to goodwill and $560,000 to a
receivable from CSI related to funding provided to the JV by Fiserv which in
turn had been advanced to CSI by the JV.
As of September 1, 1996, all operations, some of which had previously been
performed by the JV, were carried out by CSI. After the CSI transaction, ZMAX
transferred all of its interest in the JV to CSI as of January 1, 1997, and
CSI as the sole remaining venture partner, terminated the JV.
CSI
On July 16, 1996, PRCC, Inc. ("PRCC") entered into an agreement with CSI to
acquire all of the outstanding stock of CSI. On September 20, 1996, PRCC
assigned its rights under the July 16, 1996, agreement with CSI to ZMAX in
return for $20,000 in cash and the right to purchase 350,000 shares of ZMAX
common stock for $0.30 per share. The $20,000 and the fair value, based upon
the quoted market price of the ZMAX common stock, of these shares has been
charged to expense as a cost of the CSI transaction and is included in other
expenses in the accompanying financial statements for the year ended December
31, 1996. These shares were not issued until April 1997 and have been
reflected as issuable as of December 31, 1996. Similarly, the subscription
proceeds were not received until May 1997, and have been reflected as stock
subscriptions receivable as of December 31, 1996.
Concurrent with this assignment, on September 20, 1996, ZMAX made an offer to
purchase all of the outstanding shares of CSI stock. The offer was accepted by
the stockholders of CSI and the agreement was announced to the public on
September 26, 1996. The September 20, 1996, agreement also provided that ZMAX
would advance amounts to CSI to fund CSI's operations. During the period from
September 20, 1996, to November 6, 1996, ZMAX advanced a total of $390,000 to
CSI. On November 6, 1996, the Stock Purchase Agreement between CSI and ZMAX
was executed and the transaction was consummated.
In return for all of the outstanding stock of CSI, ZMAX issued 3,200,000
shares of common stock to the two stockholders of CSI. The transaction has
been accounted for as a recapitalization of CSI with CSI as the acquirer (a
reverse acquisition). At the closing, the former stockholders of CSI retained
400,000 shares of the ZMAX common stock and deposited their remaining
2,800,000 shares of ZMAX common stock (the "Restricted Stock") into an escrow
subject to quarterly release based upon the cash flow (as defined) of CSI. The
former CSI stockholders are entitled to vote the shares of the Restricted
Stock as well as to receive their respective pro rata share of any
distributions or dividends declared thereon. In March 1998, ZMAX and the
former CSI stockholders reformed certain of the agreements relating to ZMAX's
acquisition of CSI. As a result, the escrow to hold the Restricted Stock was
replaced by the former CSI stockholders holding their shares of Restricted
F-14
<PAGE>
Stock. The amended agreements provide for the lapse of the restrictions on
transferability on November 6, 2001, if such restrictions have not already
been released as a result of the CSI cash flow.
In connection with the CSI transaction, the Company incurred $54,678 of direct
costs that were charged to expense in the year ended December 31, 1996. The
Company also agreed to issue 320,000 shares of ZMAX common stock to a
consultant for services related to the CSI transaction and the related
financing. The fair value, based upon the quoted market price of the ZMAX
common stock, of 160,000 of these shares has been charged to expense as a cost
of the transaction and is included in other expenses in the accompanying
consolidated financial statements for the year ended December 31, 1996. The
fair value of the other 160,000 shares were recognized as a deferred financing
cost.
4. Eclipse Acquisition:
On December 14, 1998, the Company acquired all of the outstanding stock of
Eclipse in a transaction accounted for as a purchase. The Company acquired the
stock of Eclipse for $1,450,000 in cash and 1,700,000 shares of the Company's
common stock. The Company incurred approximately $325,000 in direct costs
related to the acquisition. The Company also entered into non-compete,
employment and shareholder agreements with the former stockholders of Eclipse.
The shareholder agreements generally restrict the transferability of the ZMAX
Common Stock issued in the transaction under certain circumstances.
The purchase price has been allocated as follows:
<TABLE>
<S> <C>
Accounts receivable $ 1,404,686
Property and equipment 226,091
Other assets 62,724
Intangible assets 6,991,593
Deferred tax liability (109,333)
Liabilities assumed and direct acquisition costs (1,178,117)
------------
$ 7,397,644
============
</TABLE>
This purchase price allocation may be subject to adjustment for changes in
estimates and to settle certain contingencies. These adjustments are not
expected to have a material impact on the Company's financial condition or its
results of future operations.
The unaudited pro forma information presented below reflects the acquisition
of Eclipse as if it had occurred on January 1, 1997. The results are not
necessarily indicative of future results of operations or of what would have
occurred had the acquisition actually been consummated on that date.
F-15
<PAGE>
<TABLE>
<CAPTION>
December 31
------------------------------------
1998 1997
------------- --------------
(unaudited)
<S> <C> <C>
Revenues $ 17,982,127 $ 6,805,439
Net income (loss) 177,895 (14,075,429)
Basic income (loss) per share $0.01 $(1.95)
Diluted income (loss) per share $0.01 $(1.95)
------------- --------------
</TABLE>
5. Intangible Assets:
Intangible assets consist of purchased software rights, goodwill acquired as a
result of ZMAX's purchase of Fiserv's interest in the JV and identifiable
intangible assets and goodwill from the Eclipse acquisition. The software
rights and joint venture related goodwill are being amortized over their
estimated useful lives of five years. Identifiable intangibles and amounts
allocated to goodwill related to the Eclipse acquisition will be amortized
over a weighted-average life of approximately 25 years. Accumulated
amortization totaled $2,291,004 and $1,237,468 as of December 31, 1998, and
1997, respectively.
During 1996, CSI licensed the rights to three software tools for a total of
$1,010,000. Two of the licenses provide for the exclusive rights to use and
modify the software for a term of 20 years. The third license, for the Change
of Century Analysis and Conversion Tool ("COCACT"), provided for the exclusive
rights to use the software in North America for a term of ten years (the
"North American COCACT License"). During 1996, the Company paid $560,000 for
the software tools, with the remaining $450,000 originally due in three equal
installments during 1997 and 1998. Interest on this obligation was imputed at
a rate of 10 percent. During 1997, the Company made one additional payment of
$150,000. As of April 30, 1997, $300,000 under the original North American
COCACT License remained unpaid. On April 30, 1997, the Company entered into an
agreement to purchase all rights, title and interest to COCACT (the "COCACT
Purchase Agreement"). Under the terms of the COCACT Purchase Agreement, ZMAX
had the right to terminate and cancel the North American COCACT License
including the obligation to pay any remaining license fees. The purchase price
under the COCACT Purchase Agreement was $1,100,000, paid in installments, plus
150,000 shares of common stock of the Company. Interest on this obligation was
imputed at a rate of 10 percent. As of December 31, 1998, all amounts due for
the purchase of COCACT had been paid.
6. Debt and Deferred Financing Costs:
Promissory Note Payable
In September 1996, the Company assumed a $385,000 promissory note payable to
Fiserv as consideration for the purchase of a 50 percent interest in the JV.
In May 1997, the $385,000 note payable and the related accrued interest of
$20,776 were settled by the Company by the issuance of 32,077 shares of ZMAX
F-16
<PAGE>
common stock to Fiserv. During 1997, a loss of $101,442 was recognized on this
conversion as the fair value of the ZMAX common stock, based upon the quoted
market price at that time, exceeded the carrying amount of the outstanding
principal and accrued interest.
Convertible Notes
In connection with the CSI recapitalization, from September 1996 to October
1996, ZMAX issued a total of $1,980,000 in convertible notes (the "Notes").
After the date of the CSI transaction, the Company issued an additional
$120,000 in Notes. In April 1997, all of the Notes were converted into
1,600,000 shares of common stock.
On the respective dates of issuance of the Notes, the conversion price of the
Notes was less than the quoted market price of the ZMAX common stock at that
time. Accordingly, because the intrinsic value of this beneficial conversion
feature exceeded the amount of the proceeds of the Notes, the entire
$2,100,000 in proceeds from the Notes were allocated to additional paid-in
capital to recognize this beneficial conversion feature. The discount on the
Notes resulting from the allocation of proceeds to the beneficial conversion
feature was reflected as a charge to interest expense and was recognized over
the period until the Notes became convertible. A total of $1,508,592 in
interest expense was recognized for the year ended December 31, 1996, related
to the discount resulting from the beneficial conversion feature. The
remaining $591,408 in interest expense was recognized in the year ended
December 31, 1997.
Convertible Exchangeable Subordinated Debentures
On December 6, 1996, the Company issued $5,500,000 in convertible exchangeable
subordinated debentures (the "Debentures"). Prior to the maturity date or
redemption by the Company, a holder had the right to convert the entire
principal balance of their Debenture into shares of common stock. The
$5,500,000 in Debentures were convertible into an aggregate of 1,100,000
shares of common stock.
On the date of issuance of the Debentures, the conversion price of the
Debentures was less than the quoted market price of the Company's common
stock. Accordingly, because the intrinsic value of this beneficial conversion
feature exceeded the amount of the proceeds of the Debentures, the entire
$5,500,000 in proceeds was allocated to additional paid-in capital to
recognize this beneficial conversion feature. The discount resulting from the
allocation of proceeds to the beneficial conversion feature has been reflected
as a charge to interest expense and has been recognized in December 1996 since
the Debentures were immediately convertible by the holders. A total of
$5,500,000 in interest expense has been recognized for the year ended December
31, 1996, related to the discount resulting from the beneficial conversion
feature.
In November 1997, the Company offered to exchange (the "Exchange") all of the
Debentures in accordance with the terms of the Debentures. The Exchange was
F-17
<PAGE>
accepted by all of the Debenture holders and, in December 1997, all $5,500,000
in Debentures outstanding were exchanged for 1,210,000 shares of common stock
and warrants to purchase a total of 1,210,000 shares of common stock. Any
accrued but unpaid interest from June 1, 1997, to the date of the Exchange was
waived by the Debenture holders.
Because the securities issued pursuant to the terms of the Exchange included
securities in excess of the securities issuable pursuant to the original
conversion terms of the Debentures, the Company recognized $7,370,000 as
expense at the time of the Exchange. The amount recognized equaled the fair
value of the incremental number of shares of common stock issued in the
Exchange in excess of the number of shares issuable upon conversion of the
Debentures in accordance with their terms plus the fair value of the warrants
issued in the Exchange.
Concurrent with the Exchange, warrants to purchase 1,069,200 shares of common
stock were exercised for $7,484,400 in proceeds to the Company. Warrants to
purchase 140,800 shares of common stock with an exercise price of $8.00 per
share remain outstanding as of December 31, 1998. The outstanding warrants
expire in December 1999. Costs of $1,261,606 were incurred in completing the
Exchange. These amounts have been reflected as a reduction to additional
paid-in capital as an offset to the proceeds of the warrant exercises and the
exchange of the Debentures.
Deferred Financing Costs
Deferred financing costs, which were incurred in connection with the issuance
of the Notes and the Debentures, were charged to expense as additional
interest expense over the life of the debt, using the interest method.
Amortization of the deferred financing costs totaled $185,767 for the year
ended December 31, 1996. During the year ended December 31, 1997, additional
amortization expense of $508,363 was recorded prior to the conversion of the
Notes and Debentures. As a result of the Exchange, unamortized deferred
financing costs of $918,471 were reflected as a reduction in additional
paid-in capital.
7. Income Taxes:
No provision for income taxes has been recorded as a result of the operating
losses incurred by the Company. The components of the provision (benefit) for
income taxes consist of the following:
<TABLE>
<CAPTION>
For the Years Ended
December 31
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income tax provision (benefit):
Current- $ 239,040 $ - $ -
Deferred- (919,326) (2,215,838) (556,133)
Valuation allowance 680,286 2,215,838 556,133
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
</TABLE>
F-18
<PAGE>
The provision for income taxes results in effective rates which differ from
the Federal statutory rate as follows.
<TABLE>
<CAPTION>
For the Years Ended
December 31
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax rate (35.0)% (35.0)% (35.0)%
Effect of graduated rates 1.0 1.0 1.0
Net operating losses 50.6 13.2 4.2
Other increases in valuation allowance 4.3 1.5 -
Non-deductible expenses (20.9) 19.3 29.8
------------ ------------ ------------
-% -% -%
</TABLE>
The deferred tax assets (liabilities) consist of the following as of December
31, 1998 and 1997 (in thousands).
<TABLE>
<CAPTION>
December 31
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,909,685 $ 3,344,084
Depreciation and amortization 41,579 245,783
Other non deductible expenses 502,324 15,824
------------ ------------
Total deferred tax assets 4,453,588 3,605,691
Deferred tax liabilities: ------------ ------------
Depreciation and amortization (276,135) (15,660)
Other (16,468) -
------------ ------------
Total deferred tax liabilities (292,603) (15,660)
------------ ------------
Net deferred tax asset 4,160,985 3,590,031
Less-Valuation allowance (4,160,985) (3,590,031)
------------ ------------
$ - $ -
============ ============
</TABLE>
The Company has determined that its net deferred tax asset did not satisfy the
recognition criteria set forth in SFAS No. 109, and accordingly, established a
valuation allowance for 100 percent of the net deferred tax asset.
For income tax purposes, the CSI transaction has been treated as the
acquisition of CSI by ZMAX. As of December 31, 1998, the Company had net
operating loss carryforwards of approximately $10,200,000 to offset future
taxable income. These carryforwards expire in years 2001 through 2012. Under
the provisions of the Tax Reform Act of 1986, when there has been a change in
an entity's ownership of 50 percent or greater, utilization of net operating
loss carryforwards may be limited. As a result of ZMAX's equity transactions,
including the CSI transaction, the Company's net operating losses will be
subject to such limitations and may not be available to offset future income
for tax purposes.
8. Common Stock and Preferred Stock:
Stock Subject to Cancellation
In September 1995, ZMAX entered into stock cancellation agreements with
certain stockholders that provided for the cancellation of 775,808 shares of
ZMAX common stock. As of December 31, 1996, these shares of ZMAX common stock
had not been returned to the Company for cancellation. In March 1997, 296,007
of these shares were returned to the Company and canceled. An additional
312,500 shares were returned to the Company and canceled in December 1998. As
of December 31, 1998, 167,301 shares remain outstanding that are subject to
cancellation agreements.
OffShore Placement
In September 1996, ZMAX sold 2,800,000 shares of ZMAX common stock at $.30 per
share to offshore investors (the "Offshore Placement").The proceeds were used
to repay existing debt of ZMAX (Note 10).
9. Stock Options and Stock-Based Compensation:
EMPLOYEE STOCK COMPENSATION
In October 1998, two of the Company's principal stockholders entered in an
agreement with a employee to transfer 180,000 shares of restricted ZMAX common
stock held by the stockholders to the employee as consideration for services.
The stockholders transferred the 180,000 shares of common stock to the
Company, and the Company, in turn, reissued the shares to the employee. The
F-19
<PAGE>
shares issued to the employee are subject to certain restrictions on
transferability for a period of one year and are subject to forfeiture back to
the Company should the employee violate non-compete provisions included in the
agreement. The Company recognized $534,384 of employee stock compensation
expense related to this transaction, based upon the fair value of the shares
issued to the employee as of the date of the agreement.
Non-Employee Stock Compensation
In September 1996, ZMAX granted options to purchase an aggregate of 200,000
shares of ZMAX common stock to a consultant under the terms of a consulting
agreement. The Company recorded $300,000 of expense related to these options
for the year ended December 31, 1996 based upon the fair value of the options
on the date of grant and the vesting period. In May 1997, the consulting
agreement was amended such that the consultant's options were canceled and the
consultant was granted 60,000 shares of the Company's common stock for
services performed from September 1996 to May 1997. The difference between the
fair value of the shares issued and the cumulative compensation expense
recorded as of the date that the agreement was amended was charged to expense
in May 1997.
1997 Stock Incentive Plan
In May 1997, the Company adopted the 1997 Stock Incentive Plan (the "Incentive
Plan"). The purpose of the Incentive Plan is to provide additional
compensation to employees, officers, directors and consultants of the Company
or its affiliates. Under the terms of the Incentive Plan, 1,700,000 shares of
common stock have been reserved for issuance as incentive awards under the
Incentive Plan. The number of shares of Company common stock associated with
any forfeited stock incentive will be added back to the number of shares that
can be issued under the Incentive Plan. Awards under the Incentive Plan and
their terms are determined by a committee (the "Committee") that has been
selected by the Board of Directors. The Incentive Plan permits the Committee
to make awards of a variety of equity-based incentives (collectively, "Stock
Incentives").
The Incentive Plan allows for the grant of incentive stock options and
non-qualified stock options. The exercise price of the options will be
established by the Committee. The term of an option will be specified in the
applicable agreement; provided, however, that no option may be exercised 10
years after the date of grant. In addition to stock options, the Incentive
Plan also allows for the grant of other Stock Incentives, including stock
appreciation rights, stock awards, phantom shares, performance unit
appreciation rights and dividend equivalent rights. These Stock Incentives
will be subject to the terms prescribed by the Committee in accordance with
the provisions of the Incentive Plan.
In February 1998, the Company amended the Incentive Plan to permit the
adjustment of the terms and conditions of outstanding options. In March 1998,
the Company and the four optionees holding options to purchase 1,300,000
F-20
<PAGE>
shares of common stock at prices ranging from $12.44 to $14.31 per share under
the Incentive Plan entered into amendments to such stock options whereby the
option exercise price was reduced to $5.75 per share, the fair market value of
the Company's common stock on that date, and the number of shares of common
stock underlying each such option was reduced by 25%. Further, two optionees
who previously had the right to exercise a portion of the shares underlying
their options agreed that such portions of their options would not be
exercisable until January 1, 1999.
1997 Directors Formula Stock Option Plan
In May 1997, the Company adopted the 1997 Directors Formula Stock Option Plan
(the "Director Plan"),. The Company has reserved 120,000 shares of common
stock to underlie stock options granted under the Director Plan. Any shares
associated with any forfeited options are added back to the number of shares
that can underlie stock options to be granted under the Director Plan.
The awards of stock options under the Director Plan are determined by the
express terms of the Director Plan. Generally, only non-employee directors of
the Company who do not perform services for the Company are eligible to
participate in the Director Plan. The Director Plan provides for option grants
to purchase 12,000 shares of common stock upon a non-employee director's
initial appointment to the Board of Directors. The option will vest
immediately as to 8,000 shares of common stock underlying such option, will
vest as to an additional 2,000 shares after the director's completion of the
first year of continued service to the Company and will vest as to the
remaining 2,000 shares after the completion of the second year of continued
service to the Company. Each option granted pursuant to the Director Plan will
be evidenced by an agreement and will be subject to additional terms as set
forth in the agreement. Options become exercisable when vested and expire 10
years after the date of grant, subject to any shorter period that may be
provided in the agreement.
F-21
<PAGE>
The following is a summary of ZMAX options granted prior to and since the CSI
recapitalization.
<TABLE>
<CAPTION>
Weighted-
Number of Option Average Exercise
Shares Price Range Price
----------- ------------ ------
<S> <C> <C> <C>
Outstanding, December 31, 1995 22,505 $ 40.00 $40.00
Granted 200,000 5.00-15.00 9.82
Canceled (14,379) 40.00 40.00
----------- ------------ ------
Outstanding, December 31, 1996 208,126 5.00-40.00 11.00
Granted 1,348,000 12.00-14.31 14.14
Canceled or expired (208,126) 5.00-40.00 11.00
----------- ------------ ------
Outstanding, December 31, 1997 1,348,000 12.00-14.31 14.14
Granted 1,932,000 2.69-6.125 5.19
Canceled or expired (1,706,500) 5.75-14.31 12.27
----------- ------------ ------
Outstanding, December 31, 1998 1,573,500 $ 2.69-14.06 $ 5.18
=========== ============ ======
</TABLE>
As of December 31, 1998, options to purchase 270,000 shares of common stock
were exercisable with a weighted-average exercise price of $5.98. The
weighted-average remaining contractual life of options outstanding at December
31, 1998, was 6.10 years. The weighted average fair value of options granted
in 1998 was $4.55.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS No. 123 defines a "fair value based method" of accounting
for stock-based compensation. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period. Prior to issuance of SFAS No. 123,
stock-based compensation was accounted for under the "intrinsic value method"
as defined by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the intrinsic value method, compensation is the excess, if any, of the
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value method.
However, entities electing the accounting in Opinion No. 25 must make pro
forma disclosures as if the fair value based method of accounting had been
applied. The Company applies APB Opinion No. 25 and the related
interpretations in accounting for its stock-based compensation.
Under the provisions of SFAS No. 123, transactions with persons who are not
employees and in which services are the consideration received for the
issuance of equity securities shall be accounted for based upon the fair value
of the consideration. The only options granted in 1996 were granted to a
consultant and were accounted for under the fair value based method; however,
the employee and director options granted in 1998 and 1997 were accounted for
under the intrinsic value method as defined by APB Opinion No. 25.
Accordingly, pro forma disclosures are presented for 1998 and 1997 only.
F-22
<PAGE>
Had compensation expense been determined based on the fair value of the
options at the grant dates consistent with the method of accounting under SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Years Ended
December 31
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net loss:
As reported $ (282,711) $(14,206,699)
Pro forma $ (957,021) $(15,465,379)
Pro forma basic and diluted net loss per share:
As reported $ (0.03) $ (2.58)
Pro forma $ (0.09) $ (2.81)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, expected volatility from 70% to 110%, risk-free interest rates from
4.10% to 6.84% and an expected term from 3 to 7 years.
10. Related Party Transactions:
In connection with the recapitalization of CSI, a consultant to the Company
and his affiliate were issued an aggregate of 320,000 shares of the Company's
common stock for services related to the CSI transaction and related financing
(Note 3). This individual and his affiliate received an aggregate of
approximately $563,000 in 1996 from ZMAX prior to the CSI acquisition as
satisfaction for amounts owed to this individual by ZMAX prior to December 31,
1995. Proceeds from the Offshore Placement were used to satisfy this
obligation. This individual served as a consultant to ZMAX through December
1997. In connection with the recapitalization of CSI, $280,000 of consulting
fees owed to this individual were satisfied in 1996 by issuing to him $280,000
principal amount of notes. In addition to incurring $120,000 in consulting
fees during 1996, ZMAX reimbursed approximately $155,000 to this individual
for expenses incurred on behalf of ZMAX. During 1997, this individual received
$120,000 in consulting fees and was also reimbursed approximately $8,700 for
expenses incurred on behalf of ZMAX.
In connection with the assignment of NewDominion's interest in the JV to the
Company, the Company retained an affiliate of NewDominion as a consultant and
a director. The Company incurred approximately $28,000 in consulting expenses
for services rendered for the year ended December 31, 1996.
F-23
<PAGE>
11. Commitments and Contingencies:
LEASES
The Company leases office space and equipment under operating leases that
expire on various dates through 2003. The Company also leases computer and
office equipment under capital leases that expire through 2002. The future
minimum lease obligations under operating and capital leases as of December
31, 1998, are as follows:
<TABLE>
<CAPTION>
Year Ended Operating Capital
December 31 Leases Leases
----------- --------- ---------
<S> <C> <C>
1999 $ 325,287 $ 42,584
2000 280,463 17,684
2001 141,528 17,684
2002 20,928 3,500
2003 10,464 -
--------- ---------
Total $ 778,670 $ 81,452
=========
Amount representing interest 11,217
---------
$ 70,235
=========
</TABLE>
Employment and Consulting Agreements
In November 1996, the Company entered into employment agreements with two
executives who were the former stockholders of CSI. The agreements provided
for a base salary plus a bonus. One of the former stockholders of CSI resigned
as an employee of the Company in April 1997. Pursuant to the terms of his
employment agreement and a separation agreement with CSI, he is collecting
severance payments from the Company in the amount of $100,000 per year through
November 1999. The other former stockholder of CSI remains an officer and
director of the Company. In May 1997, his employment agreement was amended.
Under the terms of his amended employment agreement, this employee will
receive a base salary plus a bonus based upon the performance of the Company.
The employment agreement also provides for severance payments in certain
instances. The executive is subject to certain non-compete and
non-solicitation provisions for a period of two years after termination of his
employment agreement.
In April 1997, the Company entered into a consulting agreement with its then
Chairman of the Board of Directors. In November 1998, the Chairman resigned
his position and entered into a settlement and release agreement (the "Release
Agreement") with the Company. Under the terms of the Release Agreement, the
original consulting agreement was amended and the Company agreed to pay the
former chairman $20,000 per month through October 1999. The Release Agreement
also contains non-compete and non-solicitatio provisions that extend through
October 1999.
F-24
<PAGE>
Stockholders' Agreement
In November 1996, the former stockholders of CSI entered into a Stockholders'
Agreement with the Company. Under this agreement, the former CSI stockholders
generally may not sell, transfer or otherwise dispose of any of the 3,200,000
shares of common stock received by them from ZMAX in the CSI transaction,
unless such person complies with the terms of the agreement or obtains the
prior written consent of the Company. In the event that either such
stockholder receives a qualified offer (as defined in the agreement) from a
third-party purchaser, that stockholder must notify the Company of the offer
and the Company has an option to elect to purchase from that selling
stockholder the shares of Company common stock which are the subject of the
qualified offer and under the same terms contained in the qualified offer. In
the event that either such stockholder dies, the Company will have the option
to purchase, and that stockholder's estate will be required to sell, all of
the stock of such stockholder at the current value price (as defined).
The stockholders had also entered into employment agreements with the Company.
If the employment of either of the stockholders is terminated for cause (as
defined) or if following the termination of the employment agreement, the
stockholder is determined to have breached any covenants or restrictions in
his employment agreement, the stockholder must offer to sell all of his stock
to the Company. The Company has the option to elect to purchase the stock at
its then current value price (as defined). If the employment of either of the
stockholders is terminated for a reason other than for cause excluding
expiration of the employment agreement by its terms, or if the employee
becomes permanently disabled, the stockholder must offer his stock for sale to
the Company at a price designated by the offering stockholder and the Company
will have an option to elect to purchase the stock at the offer price or, if
the offering stockholder does not designate a price, the then current value
price (as defined).
Litigation
On April 17, 1997, Alan L. Levine and Canadian Petroleum Corporation filed
suit in the Third Judicial District Court of Salt Lake County, Utah against
the Company (f/k/a Mediterranean Oil Corp., f/k/a Oryx Gold Corp., f/k/a
Pandora, Inc.) and John Does. The complaint alleges various common law claims
arising from the alleged untimely failure to remove legends restricting the
F-25
<PAGE>
transferability of shares of the Company's common stock. The plaintiffs have
alleged damages in the approximate amount of $87,000. The Company believes the
complaint is without legal merit and will vigorously defend itself.
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect upon the financial position or future operating
results of the Company and adequate provision for any potential losses has
been made in the accompanying financial statements.
F-26
EXHIBIT 21
ZMAX CORPORATION AND SUBSIDIARIES
Name State of Incorporation
---- ----------------------
ZMAX Corporation Delaware
Century Services, Inc. Maryland
Eclipse Information Systems, Inc. Illinois
EXHIBIT 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ZMAX Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of ZMAX Corporation (a Delaware corporation)
and subsidiaries and have issued our report thereon dated March 5, 1999. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14, Valuation and
Qualifying Accounts, is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 5, 1999
EXHIBIT 24
ZMAX CORPORATION
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning of Costs and Balance at
Description Period Expenses Deductions End of Period
----------- ------------ ---------- ---------- -------------
For the year ended December 31, 1998,
<S> <C> <C> <C> <C>
Allowance for doubtful accounts.............. $ - $ 17,160 $ - $ 17,160
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040257
<NAME> ZMAX CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,521,126
<SECURITIES> 0
<RECEIVABLES> 2,562,819
<ALLOWANCES> 17,160
<INVENTORY> 127,952
<CURRENT-ASSETS> 7,194,737
<PP&E> 477,870
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,446,362
<CURRENT-LIABILITIES> 1,631,593
<BONDS> 0
0
0
<COMMON> 13,117
<OTHER-SE> 15,766,936
<TOTAL-LIABILITY-AND-EQUITY> 17,446,362
<SALES> 9,916,276
<TOTAL-REVENUES> 9,916,276
<CGS> 3,478,982
<TOTAL-COSTS> 3,478,982
<OTHER-EXPENSES> 6,982,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,140
<INCOME-PRETAX> (282,711)
<INCOME-TAX> 0
<INCOME-CONTINUING> (282,711)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (282,711)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
